Economics Principles - 2012 Book Archive

1520 Pages·2012·52.78 MB·English

Economics Principles
v. 1.1
This is the bookEconomics Principles(v. 1.1).
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Table of Contents
About the Authors................................................................................................................. 1
Acknowledgments................................................................................................................. 3
Preface..................................................................................................................................... 6
Chapter 1: Economics: The Study of Choice.................................................................... 9
Defining Economics.....................................................................................................................................10
The Field of Economics................................................................................................................................18
The Economists’ Tool Kit.............................................................................................................................30
Review and Practice.....................................................................................................................................38
Chapter 2: Confronting Scarcity: Choices in Production ........................................... 42
Factors of Production..................................................................................................................................44
The Production Possibilities Curve............................................................................................................52
Applications of the Production Possibilities Model.................................................................................71
Review and Practice.....................................................................................................................................86
Chapter 3: Demand and Supply........................................................................................ 95
Demand.........................................................................................................................................................97
Supply..........................................................................................................................................................111
Demand, Supply, and Equilibrium............................................................................................................123
Review and Practice...................................................................................................................................141
Chapter 4: Applications of Demand and Supply......................................................... 149
Putting Demand and Supply to Work......................................................................................................151
Government Intervention in Market Prices: Price Floors and Price Ceilings.....................................163
The Market for Health-Care Services......................................................................................................173
Review and Practice...................................................................................................................................182
Chapter 5: Elasticity: A Measure of Response............................................................. 187
The Price Elasticity of Demand.................................................................................................................189
Responsiveness of Demand to Other Factors..........................................................................................209
Price Elasticity of Supply...........................................................................................................................218
Review and Practice...................................................................................................................................228
Chapter 6: Markets, Maximizers, and Efficiency....................................................... 236
The Logic of Maximizing Behavior...........................................................................................................238
Maximizing in the Marketplace...............................................................................................................255
Market Failure............................................................................................................................................266
Review And Practice..................................................................................................................................277
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Chapter 7: The Analysis of Consumer Choice.............................................................. 284
The Concept of Utility...............................................................................................................................285
Utility Maximization and Demand...........................................................................................................297
Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice..........311
Review and Practice...................................................................................................................................327
Chapter 8: Production and Cost..................................................................................... 334
Production Choices and Costs: The Short Run........................................................................................336
Production Choices and Costs: The Long Run.........................................................................................356
Review and Practice...................................................................................................................................368
Chapter 9: Competitive Markets for Goods and Services......................................... 375
Perfect Competition: A Model...................................................................................................................377
Output Determination in the Short Run..................................................................................................384
Perfect Competition in the Long Run......................................................................................................405
Review and Practice...................................................................................................................................419
Chapter 10: Monopoly...................................................................................................... 425
The Nature of Monopoly...........................................................................................................................426
The Monopoly Model.................................................................................................................................434
Assessing Monopoly...................................................................................................................................448
Review and Practice...................................................................................................................................459
Chapter 11: The World of Imperfect Competition ..................................................... 464
Monopolistic Competition: Competition Among Many.........................................................................467
Oligopoly: Competition Among the Few..................................................................................................477
Extensions of Imperfect Competition: Advertising and Price Discrimination....................................492
Review and Practice...................................................................................................................................502
Chapter 12: Wages and Employment in Perfect Competition.................................. 507
The Demand for Labor...............................................................................................................................511
The Supply of Labor...................................................................................................................................524
Labor Markets at Work..............................................................................................................................535
Review and Practice...................................................................................................................................546
Chapter 13: Interest Rates and the Markets for Capital and Natural Resources 553
Time and Interest Rates............................................................................................................................555
Interest Rates and Capital.........................................................................................................................564
Natural Resources and Conservation.......................................................................................................579
Review and Practice...................................................................................................................................591
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Chapter 14: Imperfectly Competitive Markets for Factors of Production............ 597
Price-Setting Buyers: The Case of Monopsony.......................................................................................599
Monopsony and the Minimum Wage.......................................................................................................614
Price Setters on the Supply Side...............................................................................................................620
Review and Practice...................................................................................................................................631
Chapter 15: Public Finance and Public Choice............................................................ 636
The Role of Government in a Market Economy......................................................................................637
Financing Government..............................................................................................................................654
Choices in the Public Sector......................................................................................................................670
Review and Practice...................................................................................................................................679
Chapter 16: Antitrust Policy and Business Regulation............................................. 684
Antitrust Laws and Their Interpretation................................................................................................685
Antitrust and Competitiveness in a Global Economy.............................................................................695
Regulation: Protecting People from the Market.....................................................................................702
Review and Practice...................................................................................................................................714
Chapter 17: International Trade.................................................................................... 718
The Gains from Trade................................................................................................................................721
Two-Way Trade..........................................................................................................................................736
Restrictions on International Trade........................................................................................................741
Review and Practice...................................................................................................................................754
Chapter 18: The Economics of the Environment........................................................ 758
Maximizing the Net Benefits of Pollution...............................................................................................760
Alternatives in Pollution Control.............................................................................................................777
Review and Practice...................................................................................................................................789
Chapter 19: Inequality, Poverty, and Discrimination............................................... 795
Income Inequality......................................................................................................................................798
The Economics of Poverty.........................................................................................................................809
The Economics of Discrimination............................................................................................................825
Review and Practice...................................................................................................................................834
Chapter 20: Macroeconomics: The Big Picture........................................................... 840
Growth of Real GDP and Business Cycles.................................................................................................843
Price-Level Changes...................................................................................................................................853
Unemployment...........................................................................................................................................869
Review and Practice...................................................................................................................................880
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Chapter 21: Measuring Total Output and Income...................................................... 885
Measuring Total Output............................................................................................................................887
Measuring Total Income............................................................................................................................904
GDP and Economic Well-Being.................................................................................................................913
Review and Practice...................................................................................................................................923
Chapter 22: Aggregate Demand and Aggregate Supply............................................ 929
Aggregate Demand.....................................................................................................................................931
Aggregate Demand and Aggregate Supply: The Long Run and the Short Run....................................943
Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium .............................957
Review and Practice...................................................................................................................................970
Chapter 23: Economic Growth........................................................................................ 977
The Significance of Economic Growth.....................................................................................................979
Growth and the Long-Run Aggregate Supply Curve..............................................................................989
Determinants of Economic Growth..........................................................................................................999
Review and Practice.................................................................................................................................1006
Chapter 24: The Nature and Creation of Money....................................................... 1012
What Is Money?........................................................................................................................................1014
The Banking System and Money Creation............................................................................................1024
The Federal Reserve System...................................................................................................................1040
Review and Practice.................................................................................................................................1049
Chapter 25: Financial Markets and the Economy.................................................... 1055
The Bond and Foreign Exchange Markets.............................................................................................1057
Demand, Supply, and Equilibrium in the Money Market....................................................................1068
Review and Practice.................................................................................................................................1085
Chapter 26: Monetary Policy and the Fed.................................................................. 1091
Monetary Policy in the United States....................................................................................................1093
Problems and Controversies of Monetary Policy.................................................................................1105
Monetary Policy and the Equation of Exchange...................................................................................1118
Review and Practice.................................................................................................................................1129
Chapter 27: Government and Fiscal Policy................................................................ 1136
Government and the Economy...............................................................................................................1138
The Use of Fiscal Policy to Stabilize the Economy................................................................................1150
Issues in Fiscal Policy...............................................................................................................................1161
Review and Practice.................................................................................................................................1169
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Chapter 28: Consumption and the Aggregate Expenditures Model..................... 1175
Determining the Level of Consumption.................................................................................................1176
The Aggregate Expenditures Model.......................................................................................................1189
Aggregate Expenditures and Aggregate Demand.................................................................................1212
Review and Practice.................................................................................................................................1220
Chapter 29: Investment and Economic Activity....................................................... 1227
The Role and Nature of Investment.......................................................................................................1229
Determinants of Investment...................................................................................................................1238
Investment and the Economy.................................................................................................................1249
Review and Practice.................................................................................................................................1254
Chapter 30: Net Exports and International Finance................................................ 1260
The International Sector: An Introduction...........................................................................................1262
International Finance..............................................................................................................................1274
Exchange Rate Systems...........................................................................................................................1286
Review and Practice.................................................................................................................................1297
Chapter 31: Inflation and Unemployment................................................................. 1303
Relating Inflation and Unemployment..................................................................................................1305
Explaining Inflation–Unemployment Relationships............................................................................1314
Inflation and Unemployment in the Long Run.....................................................................................1323
Review and Practice.................................................................................................................................1336
Chapter 32: A Brief History of Macroeconomic Thought and Policy................... 1343
The Great Depression and Keynesian Economics.................................................................................1345
Keynesian Economics in the 1960s and 1970s.......................................................................................1355
An Emerging Consensus: Macroeconomics for the Twenty-First Century........................................1369
Review and Practice.................................................................................................................................1382
Chapter 33: Economic Development........................................................................... 1386
The Nature and Challenge of Economic Development.........................................................................1389
Population Growth and Economic Development..................................................................................1404
Keys to Economic Development.............................................................................................................1414
Review and Practice.................................................................................................................................1424
Chapter 34: Socialist Economies in Transition......................................................... 1427
The Theory and Practice of Socialism....................................................................................................1429
Socialist Systems in Action.....................................................................................................................1437
Economies in Transition: China and Russia..........................................................................................1446
Review and Practice.................................................................................................................................1460
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Appendix A: Graphs in Economics............................................................................... 1462
How to Construct and Interpret Graphs................................................................................................1463
Nonlinear Relationships and Graphs without Numbers......................................................................1479
Using Graphs and Charts to Show Values of Variables........................................................................1487
Appendix B: Extensions of the Aggregate Expenditures Model............................ 1499
The Algebra of Equilibrium.....................................................................................................................1500
The Aggregate Expenditures Model and Fiscal Policy.........................................................................1504
Review and Practice.................................................................................................................................1510
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About the Authors
Libby Rittenberg
Libby Rittenberg has been a Professor of Economics at Colorado College in Colorado
Springs since 1989. She teaches principles of economics, intermediate
macroeconomic theory, comparative economic systems, and international political
economy. She received her B. A. in economics-mathematics and Spanish from
Simmons College and her Ph.D. in economics from Rutgers University.
Prior to joining the faculty at Colorado College, she
taught at Lafayette College and at the Rutgers
University Graduate School of Management. She served
as a Fulbright Scholar in Istanbul, Turkey, and as a
research economist at Mathematica, Inc. in Princeton,
New Jersey.
Dr. Rittenberg specializes in the internationally
oriented areas of economics, with numerous articles in journals and books on
comparative and development economics. Much of her work focuses on transition
issues and on the Turkish economy.
She has been very involved in study abroad education and has directed programs in
central Europe and Turkey.
Tim Tregarthen
There is one word that captures the essence of Dr. Timothy Tregarthen—inspiring.
Tim was first diagnosed with multiple sclerosis (MS) in 1975. Yet, he continued a
remarkable academic career of teaching and research. In 1996, he published the
first edition of his principles of economics textbook to great acclaim, and it became
widely used in colleges around the country. That same year, MS made him
wheelchair-bound. The disease forced his retirement from teaching at the
University of Colorado at Colorado Springs in 1998. He lost the use of his arms in
2001 and has been quadriplegic ever since. In 2002, Tim’s doctor expected him to
die.
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About the Authors
He was placed in the Pikes Peak Hospice program and was twice given his last rites
by his priest. UCCS Chancellor Shockley-Zalabak says, “I really thought that Tim
would die in hospice. That’s what the doctors told me, and I really believed that. I
remember one day they called me and told me to try to come see him. They didn't
expect him to live through the night.”
Not only did he live through the night, but he eventually recovered to the point
that he moved from hospice to a long-term care facility. There, he never let his
disease get him down. In fact, he turned back to his love of writing and teaching for
inspiration. He obtained a voice-activated computer, recruited a coauthor, Libby
Rittenberg of Colorado College, and turned his attention to revising his principles of
economics book.Unnamed Publisheris honored to publish a new, first edition
relaunch of this wonderful book, and proud to bring Tim’s incredible talents as a
teacher back to life for future generations of students to learn from.
In addition to completing the rewrite of his textbook, Tim recently completed an
autobiography about the thirty-two years he has had MS, titledSuffering, Faith, and
Wildflowers. He is nearing completion of a novel, Cool Luck, based on the life of a
friend. It is the story of a young couple facing the husband’s diagnosis of ALS—Lou
Gehrig’s disease. Remarkably, in 2007, he was able to return to the classroom at
UCCS, where he had taught economics for twenty-seven years. In January of 2009,
Tim married Dinora Montenegro (now Dinora Tregarthen); the couple lives in San
Gabriel, California.
Perhaps Tim’s approach to life is best summed up by an observation by UCCS
English Professor Thomas Naperierkowski: “One of the remarkable things is, heck, I
can wake up with a headache and be a pretty grouchy character, but given his
physical trials, which he faces every minute of his life these days, I’ve never seen
him grouchy, I’ve never seen him cranky.” Carry on, Tim.
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